[This review is
scheduled to appear in the spring 2011 issue of The Journal of Social, Political and Economic Studies.]

Book Review

The New American Economy: The Failure of
Reaganomics and a New Way Forward

Bruce Bartlett

Palgrave Macmillan, 2009

There
ought to be a special place in the pantheon of heroes for people who think for
themselves and who, though they have convictions, allow themselves to be beholden
to no fixed interest group or faction.Bruce
Bartlett, an economic historian and widely published author, has long been
associated with the Reagan legacy in the United States, but that association
has been of the sort one would expect for an independent thinker. In the 1970s,
he served on the staffs of Congressmen Jack Kemp and Ron Paul; and in the
following years was a domestic policy adviser to President Reagan and then a
treasury official in the administration of George H. W. Bush.It tells a lot about him, though, that in
2006 he authored what to many of his erstwhile associates would seem an
heretical book, Impostor: How George W.
Bush Bankrupted America and Betrayed the Reagan Legacy, and accordingly was
fired by a Republican-aligned think tank.Now he challenges a long-held cornerstone of free market, limited
government thinking by arguing that John Maynard Keynes was actually a
conservative who sought a realistic way to combat the Great Depression and
thereby to save the capitalistic system.Further, Bartlett supports a Value Added
Tax (VAT) for the United
States, a position that he says political
leaders privately tell him is sound but that has been too politically risky for
them to embrace.

It is both a weakness and a strength
that in this book he focuses almost entirely on monetary/fiscal policy to the
exclusion of all else.The strength is
that he has much valuable to say about those policies, but it would seem that
today’s economic conundrum goes far beyond them, so that the “real economy” and
manifold predicaments of the society need to be considered as part of the
economic condition.If the fiscal
deficit is a problem, this suggests that the immense cost of foreign wars, of
military undertakings throughout the world, and of overall global meliorism as
supported by both neoconservatism and neoliberalism simply have to be taken
into account.Further,
Bartlett continues the vogue among most economic
commentators of disregarding the hollowing-out of the American manufacturing
system and of employment through offshoring, out-sourcing, vast imports, and
immigration (both legal and illegal).Nor does he discuss the historic shift of the American economy into
financialization, an emphasis on finance that brought with it the many
structural pathologies that were so instrumental in producing the crisis of
2007 and beyond.All of this, and more,
is part of the economic fix the United
States is in today, so that a preoccupation
with monetary and fiscal policy hardly covers the ground.

It is incongruous that Bartlett doesn’t reach
out to include these things, because not doing so runs directly contrary to his
basic methodology.Throughout the book,
he argues effectively that economic doctrines and policies are, and ought to
be, responses to particular situations.“Economic
theory has always evolved to deal with the particular crisis of the
times.”Keynes, faced with the situation
in the 1930s, saw that wages were “sticky” and wouldn’t fall precipitously to
create the renewed demand for labor that would produce full employment, as orthodox
economic thinking in the 1930s thought they should; and Keynes saw that
monetary policy could not produce its intended effect in a deflationary
situation in which firms were unwilling to borrow.Keynes, Bartlett
points out, was responding to untoward realities.When in the 1970s “stagflation” saw a
puzzling combination of high unemployment and high inflation (puzzling because
it contradicted the inverse relationship predicted by the Phillips Curve),
“supply-side economics” offered the solution: a lowering of marginal tax rates
(to provide incentives for new ventures and thus to address the unemployment
problem), while a “tight” monetary policy put the kibosh on the inflation. Bartlett
sees that this, too, was a response to specific needs.

Keynesian fiscal stimulus has been
called for in the present economic crisis, Bartlett argues, because “the recession of
2008-2009 created deflationary conditions like those of the 1930s.”He is pessimistic, though, since he says economic
stimulus usually gets underway “well after the economy has turned the corner”;
the likelihood is that the recent stimulus it will “continue to be applied long
past the point where it is valid.” [Such
a misapplication violates Bartlett’s
commonsense prescription that policies need to be geared intelligently to the
actually-existing conditions.]

In fact, such a misuse has been the
fate of Keynesianism over the years.Keynes’ “ideas reached their pinnacle in the 1960s,” at which time “his
followers increasingly forgot that his policies presupposed deflationary
conditions.”When inflation and
unemployment ran in tandem in the 1970s, the result was to “utterly discredit
Keynesian economics for the next several decades.”The American Left moved toward “industrial
policy,” with government seeking to direct the economy, which Bartlett considers a “quasi-socialist”
policy.

It’s not surprising that
Keynesianism was equated with inflationism, even though Bartlett believes that that was not Keynes’
intent.Bartlett himself tells us that Keynes’
“analysis in The General Theory of
Employment, Interest and Money left the impression that he thought
inflation was a cure for unemployment at all times.” (This suggests that Bartlett is giving Keynes the benefit of a
limited interpretation, justifying it on the ground that Keynes’ overall
intellectual history bears it out.)Nor
is it surprising that those who saw the New Deal through the prism of
traditional American thinking thought of Keynes not as a friend of a market
economy, as Bartlett
thinks he was, but as one of those pulling toward a vastly expanded government
role.The intellectual milieu of the
1930s in the United States
was indeed far left.Roosevelt
had started with the National Industrial Recovery Act, which sought a
syndicalist-style organization of American industries, something about which
the Left’s New Republic magazine was quite
enthused until its editors found that businessmen, not government, were running
the show.The pages of the NewRepublic
became filled, as the decade went along, with calls for centralized “economic
planning.”When Keynes prescribed massive
federal spending programs, it seemed to fit right in as part of the overall
attack on limited government.

Just the same, it doesn’t hurt for
us to think back today and realize that capitalism must avoid extreme
dysfunction if it is not to give rise to remedies that capitalism’s most ardent
supporters will find distasteful.Such a
realization in effect throws down an intellectual gauntlet to those who cherish
the ideals of limited government and a market economy, crying out to them: take
it upon yourselves to find ways to address the dysfunctions.

In the late 1970s and on into the ’80s,
“supply-side economics” was precisely such a problem-solving insight.As we have noted, this combined tax-rate
reductions with a tight monetary policy.(As to the tax cuts, the lowering of marginal
rates, especially from the high rates that had existed before, was what supply-siders
saw as crucial for incentives.)Bartlett says that supply-side
economics was highly successful to address the twin problems of unemployment
and inflation, and that its premises have become absorbed into mainstream
economic thought.But, as with so much,
the policies came to be applied in ways they weren’t meant to be.During the George W. Bush administration,
Bush “and other high ranking officials frequently asserted that all tax cuts raise revenue, something
the original supply-siders never believed.” The result was that “by the end of [that]
administration, supply-side economics had become a caricature of itself,
largely disconnected from its original principles.”It is
time, Bartlett says, to drop the term altogether, allowing its thinking to
exist unnamed within economic doctrine but having it no longer available as a
catch-word to serve as a putative justification for an ill-advised anti-tax
position.

Bartlett points out that the anti-tax vogue
within the present-day American Right is fed, too, by an idea that was central
to the policies of the Reagan administration but that has proved not to
work.This was the notion that fiscal
deficits were to be welcomed because they meant that government would have less
to spend. “The idea that tax cuts would
channel concerns about budget deficits into political pressure to cut spending
has come to be called starving the beast.”Unfortunately, he says, in a chapter title that makes the point, “Starving
the Beast Didn’t Work.”What happened
was that taxes were cut “without any corresponding effort to cut
spending.”In fact, the Republican
Congress during the George W. Bush administration added “a new, unfunded
prescription drug benefit to the [Medicare] program costing trillions of
dollars.”

What is needed, Bartlett argues, is just the opposite of
“starve the beast.”In place of the
income tax, which is highly inefficient, he would seek a tax system that will
provide abundant revenue to fund adequately the entitlement programs that the
American people quite obviously value highly.A Value Added Tax (VAT) is such a tax. What is it?“The VAT… is a form of sales tax levied on producers rather than retail
sales,” giving each firm “a credit for previous taxes paid along the production-distribution
chain.”Although the tax is paid by
producers and distributors, who then add it to the sales price, “the full
burden [ultimately] falls on the final purchaser, the consumer.”Advantages: as a tax on consumption, it would
not fall on savings, which Bartlett sees as the engine of economic activity; it
would avoid the evasions and costs of administration that are so prominent a
part of the income-tax system; it would raise a lot of revenue easily; and it
would “allow a significant reduction in marginal tax rates.”Of course, the “starve the beast” proponents
object to the beast” hasn’t worked in
the past and probably won’t in the future.

There is an odd thing about Bartlett’s discussion of
the VAT.Although he acknowledges that
the tax can “be rebated on exports” [which is what other nations
characteristically do], he says that “the VAT is neutral with respect to
trade.”We recall, by way of contrast,
that Pat Choate, whose book Saving
Capitalism we reviewed in the Spring 2010 issue of this journal,[1]
favored a VAT for all the reasons Bartlett does, but considered also that a
major imperative for adopting one came from the protection it would provide to
American industry and jobs, allowing the United States to compete on a more
equal playing field.He wrote of “the
long-standing WTO policy of discriminating against direct taxes (such as income
taxes) in favor of indirect taxes (VAT), a policy bias that puts U.S. producers
and workers at a more than $355 billion annual disadvantage [in 2007] in
international trade.”He explains that
“this WTO policy allows other nations to rebate the VAT, thereby subsidizing
their exports sold in the United States,
while imposing a tariff-like VAT on U.S. imports into their
countries.”What has happened, Choate
says, is that the United States
has continued an “inequitable system [that] has its origins in the aftermath of
World War II, when the United States
was trying to speed Europe’s economic
recovery.”“Europe
recuperated decades ago;” but, perversely, “the tax loophole remains.”In seems apposite to notice that, along the
same lines, American forces continue to stand guard in the defense of Europe
and South Korea, while those who are defended spend comparatively much less on
defense, decades after each of them has become fully capable of bearing its own
burden.The United States seems to lack the
will to abandon long-obsolete largesse given to others.

It isn’t surprising that Bartlett misses this point
entirely.To do so is consistent with
his ignoring the hollowing-out of American manufacturing and with his view that
“trade protection” is a part of the “industrial policy” that he opposes as “quasi-socialist.”.
This reviewer doubts that he is trying to sneak in a protectionist tax by
dissimulation.

He misses the hollowing-out in
another connection, as well.When he
discusses the measures taken to combat the economic collapse in 2008-2009, he
focuses, as he does throughout the book, on monetary and fiscal policy.He argues that, given the collapse that
occurred in the velocity-of-money and the desire to borrow, monetary policy
would be impotent until a fiscal stimulus would increase aggregate
spending.The economist Paul Craig
Roberts, by way of contrast, points out that neither monetary nor fiscal policy
is effective to overcome American unemployment and loss of manufacturing if the
stimulated economic activity will just go toward more out-sourcing and
importing.(See the review of Roberts’
book How the Economy was Lost in our
Fall 2010 issue.)

There is considerably more in Bartlett’s book than we
have been able to touch upon here, especially with regard to the economics of
the Great Depression.Before we
conclude, however, it is worth commenting on the book’s subtitle, which speaks
of “the Failure of Reaganomics.”The
explanation for this iconoclastic view lies, of course, in the points we have
mentioned: that he finds that the Reagan administration’s hope that the size of
government would be curtailed by “starving the beast” was not in fact realized,
since the government did in fact continue to grow; and that the supply-side
principles that were important in the Reagan era have been warped into a new
anti-tax ideology that is one of the main pillars of the contemporary American
Right.Therein lies the failure of
Reaganomics.

Dwight D. Murphey

[1]This review, and the review of Paul Craig
Roberts’ book referred to later here, can be read not only in the particular
issues of this journal in which they were published, but also in the book this
reviewer has written entitled The Great
Economic Debacle – and Beyond, published in early 2011.They can also be read online on this web site.